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Feds Probe Risky Swaps Market

POSTED: 02:02 PM ET, 10/20/2008 by Derek Kravitz

Federal and state prosecutors have opened up a probe of the largely unregulated swaps market, the first such investigation started in light of the Wall Street financial crisis.

The New York Times' Vikas Bajaj first reported the joint federal and state probe in today's editions. The Securities and Exchange Commission is also looking into potential manipulation of the swaps market, in which investors buy and sell insurance protection against defaults on bonds.

The investigation is a broad look at the swaps market, which one source described to The Wall Street Journal as an "opaque market with virtually no real regulation or oversight."

(Time provided a history of the credit-default swap market before the economy went south. The swaps market was seen as "easy money for banks when they were first launched more than a decade ago. Reason? The economy was booming and corporate defaults were few back then, making the swaps a low-risk way to collect premiums and earn extra cash.")

The Wall Street Journal's source said the investigation, while in its early stages, is "moving more quickly" on the manipulation allegations.

Investigators are trying to see whether investors "drove up the price of swaps in transactions that were reported to data providers but never actually completed, according to people briefed on the investigation," The Times reported.

In return, the transactions would have greatly helped short-sellers, who profit from the decline of stock prices.

As part of the investigation, the New York attorney general's office is issuing subpoenas to stock exchanges, investment firms and three companies that helped negotiate the trades: the Depository Trust Clearing Corporation, Markit, and Bloomberg.

Bloomberg reported that subpoenas were also issued for hedge funds in New York, Texas and London.

By Derek Kravitz |  October 20, 2008; 2:02 PM ET Economy Watch
Previous: Financial Crisis, Presidential Election, Stevens Trial | Next: Scandal-Plagued Oil Agency Revamping Itself

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